I agree to some degree - debt is not in and of itself bad for a given income provided you can pay it back. The crux though is the "provided you can pay it back" part.

I do believe that debt is a self-reinforcing thing, and I also think that our economy has an inherent tendency to follow more and more riskier debt-paths (a la Hyman Minsky). This leads to inevitably larger and harsher bubbles and crashes (in assets prices and the like). Since, arguably, physical asset values are more prone to bubble crashes than actual income flow, you can see how debt is a problem inherently precisely because, if you buy the inherent tendency argument, it's an unstable long-run condition that will always lead to a huge bust because the bust will mean you won't be able to pay off your debts, or at least others will perceive you aren't able to pay of your debts. All this feeds into increased market uncertainty and ever-increasing low expectations of firms regarding the profitability of future investment a la Kalecki and others....

Even beyond all this, in a highly leveraged and highly finance and credit-driven economy (as ours has become over the last 30 years), the ability to use debt financing is not always tied to assets (or at least good assets). Part of the inherent tendency argument is that as more and more riskier financings are used, lenders are willing to loan money based more on speculation and are willing to lend on 'easy' terms to borrows with suspect assets. This of course can continue for a long time until, en masse, the lenders realize who they've been lending to - which leads to a crash.

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Garth Brazelton

About Me

I work for the Indiana Economic Development Corporation as the Director of Operations and Business Systems, and I teach macroeconomics at Indiana University (Indianapolis). Previously, I was an Economist at the US DOT in Cambridge, MA. This blog does not represent the opinions of any of these organizations.